The professionalization of sustainability reporting continues.

Sustainability reporting is in an ongoing process of professionalization – a development that is driven by several factors and interests:
Stakeholders such as employees, customers, investors, communities and NGOs demanding more transparency and accountabilityInvestors who need comparable and reliable data across different industriesBusinesses that want to standardise processes and demand a level playing field for allRegulators and standard setters who want to redirect funds to sustainable companies and break the monopoly of information held by ESG rating agencies 
While globally a variety of actors are working on new rules and standards, the European Sustainability Reporting Standards (ESRS), the Corporate Sustainability Reporting Directive (CSRD) and internationally the Global Reporting Initiative (GRI) and the International Sustainability Standards Board (ISSB) are currently the most influential frameworks.
 

Compliance gains importance

The new rules are forcing reporting teams to strengthen their collaboration with other teams in-house. As a result, they are increasingly delegating responsibilities to finance and compliance officers.
 
These compliance officers have experience in interpreting a complex regulatory framework and are also responsible for ensuring compliance and monitoring the robustness of sustainability data and disclosures.
 
This development is important as many regulations leave room for interpretation, and it is unclear what "full compliance" actually looks like in practice.
 

The materiality assessment as a starting point

The basis of all sustainability reports is already a materiality assessment. It ensures that sustainability reports go beyond superficial success stories and instead address the most relevant issues for the organisation and its stakeholders.
 
While the ISSB leaves it up to companies to define their own processes for materiality analysis (compared to financial reporting), the ESRS has set strict guidelines for implementation with its concept of dual materiality.
 
Dual materiality refers to sustainability issues being considered from two interrelated perspectives: The first focuses on the impact that a company and its value chain have on society and the environment (e.g. water consumption), while the second focuses on the fact that these issues can also pose financial risks to companies (e.g. production cuts due to water scarcity in the wake of climate change).
 
Although the rules are still changing, large companies in the European Union, as well as non-EU companies with significant EU subsidiaries, have already started to prepare for compliant reporting, including defining and implementing new processes for conducting materiality analyses.
 

Materiality analyses as a compulsory exercise

Whenever top managers criticise the costs associated with materiality analyses, one argument usually comes to the fore: what new insights can we gain from a materiality analysis that we didn't already have?
 
This argument, coupled with cost pressures, leads many companies to view materiality analyses as a regulatory burden that must be managed with minimal effort.
 
However, reducing a materiality analysis to the minimum mandatory requirements undermines its potential. It can only deliver its full benefits if it brings together diverse stakeholders - internal as well as external - to weigh and assess the different perspectives.
 
Not surprisingly, sustainability issues are multi-layered, complex and interdependent. When this is recognised and collaboration between stakeholders is encouraged, materiality analysis can provide a deeper understanding of sustainability issues, particularly in terms of issue drivers.
 
In addition, insights can be gained on possible actions to further increase sustainability in the most relevant areas. Encouraging news is also that some of the work required can be simplified using artificial intelligence (AI) tools, particularly in the area of issue monitoring.
 
AI tools can be used in a supportive way, but cannot replace human interaction. No one will know this better than corporate communicators. Therefore, communicators should seize the opportunity to actively participate in shaping new processes and help create a materiality analysis that unearths real insights and action orientation.
 
"It is vital that increasing regulation does not stifle open dialogue and communication, as these are crucial for companies and stakeholders to work together to address the challenges facing society today."
- Shanna Wendt, VP Communications, Coca-Cola Europacific Partners.
 

How a comprehensive materiality analysis can add value

In their work, corporate communicators often look for innovative ways to bring their company's legitimate voice to bear on important social issues. At the same time, they need to focus stakeholder attention on relevant business strategy issues. It is a balancing act that requires finding the right words and channels to engage stakeholders in dialogue, build trust and - ultimately - convince them.
 
A comprehensive materiality analysis can offer more than just a better understanding of sustainability issues, which in turn can improve sustainability communication. It can serve as a central hub for systematic stakeholder engagement by linking external demands and expectations with internal insights and perspectives on business risks and opportunities. In doing so, it provides valuable insights into the underlying drivers of an issue and also identifies conflicting objectives that need to be addressed.
 
Empowered by the knowledge of a comprehensive materiality analysis, communicators can enrich their strategy with targeted key messages, address stakeholder expectations, illustrate the organisation's progress and challenges towards a more sustainable business model, and enter into important discussions about possible trade-offs in conflicting objectives.
 
Expert quote: "Corporate communicators should take advantage of the opportunities of dual materiality, especially with regard to issues that require more collaboration and stakeholder engagement.
 
We can expect to see more issue-specific collaboration, open dialogues and coalitions between a variety of stakeholders in the future. The great potential of this collaboration is to find accepted solutions to issues that are of great importance to all stakeholders."
- Dennis Larsen, Fellow at the Nordic Alliance of Communication and Management and member of the Board of the European Association of Communication Directors (EACD).
 

Elements of a comprehensive materiality analysis

Although there are various ways to design any processes, there are some elements that distinguish a comprehensive materiality analysis:

1. It integrates information on how the company and its value chain will develop in the future.
2. It is based on clearly defined topics and sub-topics, distinguishing between the two sides of the double materiality, because the cause-effect relationships are often very different.
3. It involves internal issue experts when collecting, interpreting and evaluating material issues.
4. It involves different stakeholders, determined according to the issue:
   a. those who are part of the company's value chain and/or will be in the future e.g., employees.
   b. those who drive public debate on specific issues, e.g., NGOs.
   c. those who evaluate a company's performance in comparison to others, e.g., investors.
5. use the necessary tools to continuously monitor issues or identify those stakeholders who decline direct interaction or are unable to participate. 

Corporate communicators, with their expertise in substantive issues, stakeholder engagement and the media landscape, are uniquely positioned to help companies develop a materiality analysis that is more than a mere compliance exercise.
 
Simultaneously, corporate communicators benefit from a deeper understanding of why issues are material, to whom they are most relevant and how they might evolve in the future. It is therefore crucial that they actively engage and contribute to the design and implementation of the new process.

Read german version:  2023-06-25_Kommunikationsmanager_Doppelte_Wesentlichkeit.pdf